Credit Unions Beat Banks in Weathering Tough Times, Says Study

Even in the middle of recessions and the unemployment and foreclosures that come with them, credit unions have proven that they can weather downturns.

That’s according to a new report from the Filene Research Institute, “Commercial Lending During the Crisis: Credit Unions vs. Banks,” which revealed that credit unions’ aggregate loan portfolios appeared to be about 25% less sensitive to macroeconomic shocks than those of banks.

Among the findings, from 1996 to now, credit union commercial loan growth has been steady and withstood the last two recessions, noted David M. Smith, author of the report and associate professor of economics and associate dean of academic affairs at the Graziadio School of Business and Management at Pepperdine University.

Commercial loan growth rates for banks turned negative following the recessions beginning in 2001 and 2007, but credit union growth rates remained positive during both periods.

Smith found that the bank loan delinquency rate appears to track the unemployment rate fairly concurrently, with a slight lag, while the credit union delinquency rate appears more divergent and less predictable.

In the 2001 recession, banks’ delinquency rates led to more delinquencies in commercial loans – relative to overall loans–while the opposite has occurred in the most recent recession, where the overall delinquency rates are higher.

Turning to credit unions, their commercial loan delinquency rate, when aggregated, almost always exceeds the overall delinquency rate, according to the Filene report.

“This is consistent with the notion that credit unions serve customers of modest means, including individuals who are unable to procure loans from other depository institutions,” Smith said. “Individuals of modest means are more likely to be negatively impacted by an economic downturn.”

In economic boom times, such as the late 1990s and mid-2000s, bank and credit union business loan charge-off rates tended to be similar in magnitude, according to Smith. However, during times of economic stress, bank charge-offs appeared to be more responsive to the business cycle than credit union charge-offs, an area he said will be tested later with an econometric analysis.

“If the economy needs as much kindling as possible, shouldn’t credit unions be able to help?” asked Ben Rogers, Filene research director. “Opponents of the loosened standards argue that increasing credit unions’ ability to lend to businesses goes against their historical mandate and should threaten their tax-exempt status, arguments that are beyond the scope of this report.”

An analysis of Call Report data between 1986 and 2009 from banks and credit unions showed that the most conservative estimates suggested credit union loan portfolios appeared to be about 25% less sensitive to macroeconomic shocks than bank loan portfolios.

“This report zeros in on commercial loan performance–in particular, loan delinquencies and net charge-offs–and examines the sensitivity of these variables to a key business cycle indicator: employment,” Smith said. “If credit unions’ commercial portfolios are as risky as, or less risky than, banks’ portfolios, it should follow that the business loan delinquencies and charge-offs of credit unions will be less sensitive to business cycle downturns than will those of banks.”

Indeed, there is further proof that credit unions managed to continue lending in the midst of financial sector relapses. In 2011, the SBA published a report on how credit unions filled a void in business lending over a 24-year period as banks scaled back.

Smith said a nationwide survey of 7,500 small businesses in fall 2011 revealed limited access capital was the number one obstacle for them to creating new jobs. Of the 1,667 small businesses that sought bank loans over the last 12 months, less than half were successful, according to data cited in the report. He also cited CUNA data that showed from December 2007 to September 2011, business lending was down 2.2% for banks yet increased 43.2% for credit unions.

As trade groups and proponents continue to lobby in Washington to increase the current member business lending cap from 12.25% to 27.5% of assets, some bankers have cried foul on whether more latitude will create an uneven playing field. This, despite credit unions only having about 6% the commercial lending market share, which is a percentage that has been relatively constant for more than 20 years, according to Smith.

Even with community bank mergers and consolidation, Smith said if credit unions were allowed to expand business lending, it is unclear whether this expansion would materially encroach on the markets that banks serve.

What about the periods following recession? Smith found that commercial loan growth rates turned negative while credit unions experienced positive growth between 1997 and 2010, the period of the country’s last few recessions. Still, credit unions had to deal with a decline most likely linked to MBL cap restraints.

“If that is the case, it has implications for the ability of credit unions to contribute to economic recovery in future recessions, if the regulatory cap is to remain in place,” Smith said.